China Shanghai Free Trade Zone A Test Bed for Economic/Social Reform

China is set to open the Shanghai Free Trade Zone at the end of the month. The new trade zone will lift numerous regulations and restrictions on businesses. The new zone will also allow for greater social freedom, and will lesson internet censorships.

The Shanghai Free Trade Zone is a 30 square kilometre area that is currently being developed to support liberalized free trade. If things go well, the free trade zone could be expanded to include the entire Pudong district, which is home to some 5 million people. The zone will act as a test bed for installing financial, economic, and social reforms.

China generally restricts 100 percent foreign ownership in local industries. This means that multinational companies must often partner with local firms to launch projects. While details have not yet been made fully available, it is believed that the new free trade zone will be much friendlier to foreign companies and investors. Many FDI regulations will also be lifted in the free trade zone. While some industries will likely remain regulated, it is anticipated that increased foreign ownership and participation in the local economy will be allowed.

Perhaps most importantly, the Chinese government will relax its tight controls on financial markets and will allow for more freedom within the trade zone. The Yuan will be made be given more freedom in regards to exchange and convertibility. This could foreshadow a larger move to liberalize the currency, which is currently tightly regulated by the government. In the larger picture, China is looking to establish the yuan as an internal reserve currency. To do so, however, will most likely require increased liberalization of the currency. The FTZ will allow China to begin experimenting with reform.

Interest rates will also be liberalized inside the free trade zone. Currently, the Beijing government maintains tight control over interest rates. The move towards market liberalization should help China grow a major financial services sector on the mainland. Currently, many businesses prefer to conduct financial transactions through Hong Kong.

Facebook and Twitter were originally accessible in China

Internet access will also be deregulated. China is well known for tightly regulating the internet and use of social media sites. The “Golden Shield”, often nicknamed the Great Chinese Firewall, ensures tight control over the dissemination of information via the web. Facebook and Twitter were originally accessible in China, however by mid-2009 the government blocked most social media websites amid violent rioting in Xinjiang and other incidents. The government accused social media sites of aiding efforts for people to organize violent protests. Within the Shangai Free Trade Zone, many of these websites will now be accessible.

Many analysts believe that the Shanghai FTZ will act as a sort of test bed for relaxing government rules. In a very real sense, the FTZ could become a sort of stepping stone to test out wider economic and social reforms. The simple fact is that China might someday be forced to relax censorships and government control. As China’s population grows more affluent, they will also begin to increasingly demand more freedom. Further, as businesses grow more prosperous, they too will most likely begin to demand increased freedoms and liberalized market reforms.

China is looking to test increased freedoms via the FTZ

Still, reform and liberalization will likely remain slow. At the same time that China is looking to test increased freedoms via the FTZ, the government is also launching a major crackdown on the internet. Further, don’t be surprised if the government later decides to pull the plug on internet freedom in the FTZ. The Chinese government has already proven that stability is the larger priority and it will act quickly to censor discontent.

Likewise, if economic reforms generate instability, the government may grow more weary of national reforms. While there are hopes that the free trade zone will lead to increased liberalization, it’s possible that it could ultimately backfire. If policies turn out to be ineffective, it could actually slow larger national reforms. Either way, the Shanghai FTZ will likely be a closely watched development in the months to come. If reforms are well received, the FTZ could foreshadow larger national reforms in the months or years to come.